With growth weakening and inflation falling the Investment Clock is in Reflation. Stocks have responded positively as a wide range of central banks have started to ease policy. However, business confidence remains fragile and Europe’s crisis is in remission not retreat. It may take a new sell-off in stocks and a drop in inflation expectations to shock policy makers into the full-hearted quantitative response we think will be needed to underpin the next recovery.
Recovery follows Reflation but we are concerned investors are too optimistic on the degree of ease that will come in the near term, particularly in the US where stocks prices are back at cycle highs. High thresholds to effective action suggest things may have to get worse before they get better and it could still take a few months before the conditions for a new Recovery phase are in place.
LEAD INDICATORS IN FOCUS
- In July there was a further drop in the inflation scorecard as consensus CPI fell.
- Our global growth scorecard has continued to weaken.
- There has been a fall in business confidence.
- Economists have downgraded their GDP growth forecasts. And the OECD lead indicators have rolled over, which suggests a slowdown.
CURRENT ASSET ALLOCATION POSITIONING
- The fundamental environment is against “risk-assets”, but technical indicators have improved. Therefore, we have added to equities and commodities and this has partly reduced their underweight.
- Within equities, we maintain our overweight in the US and still prefer it versus the eurozone. However, we reduced our overweight position in US equities, to increase exposure to UK equities, which is now our biggest regional overweight. We like the UK based on stocks valuations, positive company earnings revisions and technical factors.
- We also increased our overweight positions in property securities and maintain big overweight in global government bonds.
- Within commodities we are still very underweight. We have a diversified exposure but we have a bias in Gold.
Trevor Greetham joined Fidelity in January 2006 as Asset Allocation Director. In addition to managing funds, Trevor is a member of Fidelity’s Asset Allocation Group.
Prior to joining Fidelity, he spent ten years at Merrill Lynch, where he was Director of Asset Allocation. Trevor began his career with UK life insurer Provident Mutual. He holds an MA in Mathematics from Cambridge University and is a qualified actuary.
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